ACCA Comments on Lending Guarantees
Small Business News – 15th January 2009
Lending guarantees could be great value for money, but watch what banks and businesses do with them, says ACCA
ACCA (the Association of Chartered Certified Accountants) welcomes the government’s decision to guarantee up to £21bn of loans to small and medium-sized enterprises (SMEs).
Professor Robin Jarvis, head of ACCA’s SME Committee, says:
“If implemented properly, loan guarantees could help hundreds of thousands of smaller firms access credit on reasonable terms – giving them a better chance of surviving the downturn and retaining employees.”
ACCA’s SME Committee, on which both banks and small businesses are represented, has called for loan guarantees to secure working capital since November 2008. In submitting evidence to the Business and Enterprise Committee in early December 2008, ACCA also stressed the need to strengthen supply chains and appreciate the systemic nature of the risk they transmit between customers and suppliers.
The effectiveness of the guarantees will now depend on how widely they are used, their effect on trade credit and default rates among beneficiaries, and on whether they will be able to encourage new lending in addition to refinancing existing loans.
Professor Jarvis concludes:
“Lending guarantees will not solve all of the sector’s problems, nor will they keep a large number of businesses from going to the wall. But they could help those businesses that are fundamentally sound while restoring lenders’ confidence – all at a cost far lower than that of any reasonably effective fiscal stimulus.”
LENDING GUARANTEES: 3 SCENARIOS
1. In the best-case scenario, guaranteed lending would help banks reassess the creditworthiness of those borrowers past the credit event horizon – the point at which risk is either too high or too indeterminate to bother. High uptake could restore the flow of not only bank but also trade credit and result in lower default rates overall.
2. A more likely scenario would see the overall supply of credit rising very slowly, as lenders choose to strengthen their balance sheets by swapping bad loans for government-guaranteed ones. This is still a relatively positive outcome as more confident banks should eventually be able to offer more and cheaper credit.
3. The worst-case scenario would involve insufficient uptake of the guarantees to make any difference to business sentiment or banks’ balance sheets. In the absence of trade credit, lending will only postpone the inevitable for the few beneficiaries, leaving the taxpayer slightly worse off for guaranteeing their debt.